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In this video, I explain how buying houses subject to the existing mortgage works. Buying houses “Subject To” which is often abbreviated to “Sub To” is a very powerful strategy, especially in today’s market where rates have moved from 3% to 8%.
Buying a house subject to the existing mortgage essentially means that you are agreeing to buy the house and assume the seller’s mortgage. As an example, if you agreed to buy a house for $350,000 and the seller owed the bank $350,000 you could agree to buy the house subject to that existing $350,000 mortgage.
If you purchased the house in the above example, as an investor your cash out of pocket would be zero. Why would a seller agree to this? Most sellers wouldn’t, but if your seller is motivated to sell, or they have been trying to sell and have not been able to sell, then they may consider agreeing to this strategy.
In Today’s market, many sellers are unrealistic about what their property is worth. They still think it’s worth what Zillow said it was worth 12 months ago (or what they heard a neighbor down the street sold their house for). But when they decide to list their property for sale, they are surprised to see that they are not getting any offers. And the reason they are not getting any offers is because the market has changed.
Prices have come down from what Zillow said their house was worth 12 months ago. And since interest rates have increased from 3% to 8%, many buyers that would have qualified for a mortgage to buy their house can no longer qualify for a mortgage because the payment is too high and it exceeds their debt to income ratio.
Some sellers have a buyer sign a purchase contract and are waiting to close when they find out 3 weeks before closing that their buyer didn’t qualify for a mortgage.
At this point, the seller begins to get worried. The typical seller has already started packing up the contents of their house in boxes. It did not occur to them that the buyer may not qualify for a mortgage. When they find out that the buyer is not buying their house, the seller may begin to worry about selling their house. If the realtor has reduced the listing price before they got an offer they become even more concerned, especially if they see listings in their neighborhood being reduced (or more houses being listed for sale).
This worry is exacerbated by the fact that they have already packed up most of their house and already have somewhere that they are moving to (like a new house that they are buying). They are essentially committed to leaving the house and now need it sold. What are they going to tell their kids? So they tell the realtor to lower the price again.
And their property sits on the MLS for 30, 60, or even 90 days with no offers. Their agent tells them to reduce the price again and they agree. Meantime, prices are coming down and the seller begins to realize that they would be lucky to sell the house and pay off the mortgage after factoring in commissions, closing costs etc.
As an example, assume that the seller had a house that they wanted to sell for $400,000. And let’s say they had a mortgage balance of $350,000. The commission of 6% on a $400,000 sale is $24,000. Closing costs of around 2.5% would be an additional fee of $10,000.
Buyers are required to complete an “Inspection” on a property prior to agreeing to buy it to make sure that there is nothing wrong with the roof, plumbing, electrical, AC, etc. Typically there will be some items that are required to be repaired which the seller may either repair themselves or agree to give a credit to the buyer for the amount of repairs. A credit of $5,000 would be typical on a $400,000 house.
So if the seller listed their house for $400,000 and had a mortgage of $350,000, they would only walk away with $11,000 if they got a full price offer!
See the breakdown below:
So what would happen if the buyer fell through because they could not qualify for a mortgage and they reduced the price to say $390,000 and found a buyer? The seller would net zero! They would essentially be walking away with nothing. What if their best offer was $375,000.
They would have to PAY $15,000 to sell their house!
And at this point, that is where a seller will be motivated enough to consider this strategy since they are motivated to sell and there is no other way that they can sell and walk away.
If you are going to buy houses subject to their existing mortgage you need to do it correctly.
You need to hire an attorney to handle all of the paperwork and the closing.
And you need to be able to explain to the seller how this strategy works. You need to understand it before you can use it because the seller will have lots of questions and you are going to need to have the answer to their questions.
*Disclaimer: This is not to be construed as legal advice. Please consult with your attorney before employing this strategy *
You need to learn how to buy houses with no money down by buying houses subject to the existing mortgage. This is the perfect market for it. in 21 years of real estate investing I have never seen a market where this strategy works so well as today’s market. Interest rates are up, which means you can no longer get a 3% mortgage. Taking over someone else’s 3% mortgage is a huge benefit, and you don’t need to qualify or be approved by the bank. You also don’t pay any fees to assume the mortgage and no one is checking your credit.
Sellers are now realizing that they cannot sell their house for what they thought they could. And this means anyone who purchased in the last two years probably has little to no equity. Sellers are nervous because their house is not selling. So you are able to essentially use the banks existing low interest rate financing on a property to take over the mortgage. The seller get’s to walk away from a property that they were not able to sell. And you don’t even need to have good credit to employ this strategy!
Buying houses subject to means being able to buy an unlimited number of houses because you don’t need to put any money down to employ this strategy. You can literally buy thousands of houses with the subject to strategy. Each house that you buy will add hundreds (or thousands) of dollars of cash flow. You can build up a million dollar real estate rental portfolio and hundreds of thousands of dollars per year in cash flow by learning how to buy houses subject to. You can also sell these houses on lease options (rent to own) for substantially higher than what you paid for them. I teach my students how to do this at the Fixing & Flipping Houses Boot Camp which is coming up in a few weeks. Click the button below to learn more about the Boot Camp. There are only a few seats left.
